Power Point Slides Twelve: Worldly Philosophers Ch. 6

May 5, 1818
March 14, 1883
BIOGRAPHY
http://www.econ.unt.edu/~
dmolina/econ4510.htm
KARL HEINRICH MARX
 Karl Marx born in Trier,
Bruckergasse 664
 son of Jewish lawyer
Heinrich
Marx and his
wife Henriett
 Appears to have had a
normal childhood
 Father baptizes Karl
and
his 5 sisters and a
brother
into the Protestant church
 http://www.econ.unt.edu/~dmolina/econ4510.ht
m
 The reason he converted to Christianity was in order to reduce
the limitations in his profession Jews normally encountered
 Not surprisingly, at a very early age Marx begins to wonder
about the devotion aspect of religion and places its importance
more as a social phenomenon
 http://www.econ.unt.edu/~dmolina/econ4510.htm
 Not surprisingly later in his life he is quoted as
stating that:
 “Religious suffering is, at one and the same time,
the expression of real suffering and a protest
against real suffering. Religion is the sigh of the
oppressed creature, the heart of a heartless
world, and the soul of soulless conditions. It is
the opium of the people.”
 In his Critique of Hegel's Philosophy of Right.
Introduction]
 http://www.econ.unt.edu/~dmolina/econ4510.ht
m
 On October 15th, 1835 at the age of 17 he enrolls at the
University of Bonn
 He last there less than a year since he flunks out due to
excessive partying…
 http://www.econ.unt.edu/~dmolina/econ4510.htm
 Marx spends his summer
vacations in Trier. In Summer of
1836 becomes secretly engaged
to Jenny von Westphalen,
daughter of
Government Counselor Ludwig
von Westphalen.
 http://www.econ.unt.edu/~dmoli
na/econ4510.htm
 On October 22 1836, Marx is enrolled in the Faculty of Law of
Berlin University.
 After completing his studies in Berlin he attends the University
of Jena.
 Writes a dissertation entitled: “he Difference Between
Democritean and Epicurean Natural Philosophy” Obtain Ph.D.
in April of 1841
 http://www.econ.unt.edu/~dmolina/econ4510.htm
 Wife dies on December 2,
1881
 1882 his health deteriorates
 He dies on March 14, 1883
 Marx passed away
peacefully in his armchair
 He lies buried next to his
wife at Highgate Cemetery in
London.
 http://www.econ.unt.edu/~dmolina/
econ4510.htm
 Here is a brief list of works by Karl Marx
 1844:
 A Contribution to the Critique of Hegel's Philosophy of Right. Introduction
 Outlines of a Critique of Political Economy
 Critical Notes on "The King of Prussia"
 Economic and Philosophic Manuscript
 1845: Theses on Feuerbach
 http://www.econ.unt.edu/~dmolina/econ4510.htm
 He also wrote many articles with F. Engels
 Communist League (1847)
 The Communist Manifesto (1848)
 England's 17th c. Revolution (1850)
 The Alleged Splits in the International (1872)
 Reformists in Germany's Social-Democratic party (1879)
 http://www.econ.unt.edu/~dmolina/econ4510.htm
 The most important work by Karl Marx is clearly Das Kapital
which appeared in three volumes. Only volume I appeared
while he was alive (in 1867).
 Volumes II (1885) and III (1894) were edited by Engels and
appeared after Karl Marx’s death in 1883
 http://www.econ.unt.edu/~dmolina/econ4510.htm
Marx Overview
What Das Kapital is About
•Karl Marx (1867). Das Kapital
•Das Kapital is a study of
capitalism
•Not much of an effort is made
to explain socialism and
communism.
Stage of Development
• Adam Smith:Society progresses from huntergathers, to agriculture, to industry and trading
stages. The latter stage is capitalism. From
there society progresses towards a stationary
state of falling profits.
• David Ricardo:Society progresses towards a
stationary state of falling profits, subsistence
wages, and high rents.
• Karl Marx: Society progresses from feudalism, to
capitalism, to socialism, to communism.
Marx Overview
Feudalism to Capitalism
• from the Communist Manifesto…
• The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal,
patriarchal, idyllic relations. It has pitilessly torn asunder the motley feudal ties that
bound man to his "natural superiors," and has left remaining no other nexus between
man and man than naked self-interest, than callous "cash payment."
• It has drowned the most heavenly ecstasies of religious fervour, of chivalrous
enthusiasm, of philistine sentimentalism, in the icy water of egotistical calculation. It
has resolved personal worth into exchange value, and in place of the numberless and
feasible chartered freedoms, has set up that single, unconscionable freedom--Free
Trade.
• In one word, for exploitation, veiled by religious and political illusions, naked,
shameless, direct, brutal exploitation. The bourgeoisie has stripped of its halo every
occupation hitherto honoured and looked up to with reverent awe. It has converted
the physician, the lawyer, the priest, the poet, the man of science, into its paid wage
labourers. The bourgeoisie has torn away from the family its sentimental veil, and
has reduced the family relation to a mere money relation.
Marx Overview
One Capitalistic World
• from the Communist Manifesto…
• The bourgeoisie, by the rapid improvement of all
instruments of production, by the immensely facilitated
means of communication, draws all, even the most
barbarian, nations into civilisation. The cheap prices of
its commodities are the heavy artillery with which it
batters down all Chinese walls, with which it forces the
barbarians' intensely obstinate hatred of foreigners to
capitulate. It compels all nations, on pain of extinction,
to adopt the bourgeois mode of production; it compels
them to introduce what it calls civilisation into their
midst, i.e., to become bourgeois themselves. In one
word, it creates a world after its own image.
Marx Overview
Conflict in Capitalism
• Karl Marx saw the basic conflict in capitalism to
be between labor and the owners of capital.
Remember that Marx was writing in the middle
of the 19th century. At this point in the history
of England, workers generally worked six to
seven days a week, with the work day extending
beyond 10 hours a day. Workers were not
allowed to unionize, and wages were at or near
subsistence.
Marx Overview
How Socialism Arises
• As capitalism developed, the ability of small firms to survive the
competition of the system was bleak. As these small firms were
driven out of business, the owners of the smaller firms went to work
for the larger firms that survived.
• Consequently, the population of labor was continually expanding
while the population of owners was declining.
• Marx believed that under capitalism the workers were producing the
profit that the owners of capital were able to keep. Given the
changes in the population of workers and owners, Marx believed
that eventually the workers would rise up and seize the means of
production. In this way, the economic system of socialism would be
born.
Marx Overview
Just Employee Owned?
• One could argue that “workers owning the
means of production” is essentially the same as
the employee-owned companies we see today (or
the practice of giving stock-options to workers).
• So did Marx just want everyone to follow the
example of these firms?
• http://www.nceo.org/articles/employeeownership-100
The Communist Manifesto
•It appears Marx wanted more
than just Employee
Ownership.
•10 points from the Communist
Manifesto (scroll to the end)
– Hegelian Philosophy
Thesis
Anti-thesis
Synthesis
+ Building on the work of Hegel
+ Thesis, antithesis, and synthesis
– The History of Thought can be represented as a conflict between a
thesis and antithesis, with the conflict resolved via the synthesis,
which becomes the new thesis
– Society evolves by this process in a drive towards perfection. The
driving force is conflict between the existing thesis and the antithesis.
– The process and the means of investigation is called the dialectic
+ Hegel focused upon ideas whereas Marx focused on the
material world. Hence Marx’s philosophy is called dialectical
materialism.
+ Society can be segmented into two parts:
1. The forces of production: Technology, labor skills, scientific knowledge,
and capital goods. These forces are inherently dynamic.
2. The relations of production: Rules of the game, inherently static.
+ The thesis is the relations of production.
+ The anti-thesis is the forces of production.
+ Initially there is harmony. However, as technology develops the relations
of production are no longer consistent with the forces of production. This
conflict leads to social revolution until the new relations of production are
established.
Religion, Law, Government
Static
Dynamic
Social Superstructu
Relations of
Production
Private Property,
Wage System
Forces of Production
Land, Labor, Capital, and Technology
+ Feudalism and the Dialectic
+ The relations of production: Tradition dictates the allocation
of goods.
+ Society is characterized as follows:
– Self-sufficient manors that must fend off the forces of
nature and other lords. Work is hard but necessary for
the people to survive. There is little or no trade, if you
need a good or service you must produce the good
yourself.
– Hence, the relations of production are established in light
of the forces of production.
+ Capitalism and the Dialectic
+ Increasing technology and trade alters the forces of production. To
maximize economic growth, the fetters of feudalism must be
removed.
+ Hence a new synthesis is developed where the profit motive is
nurtured and economic growth results.
+ How does capitalism end? Workers are exploited by capital. Once
people’s material needs are met, the alienation of the market will
lead people to establish a new economic system, socialism.
+ Note: This is not the only story Marx tells about the end of
capitalism!
+ Socialism: Means of production is transferred from capital to
labor. However the incentive system of capitalism remains.
+ Communism: A classless society where people are not
motivated by monetary or material incentives.
+ “From each according to his ability, to each according to his
needs.”
+ Marxian thought regards human beings as perfectible and
human goodness is suppressed by a market economy.
Food and Economic Growth


As the economy grows – and technology improves–
the amount people spend on food declines.
What if technology improves to a point where the
necessities of life are available to everyone at little
or no cost?
The Replicator (from Star Trek)
The Economics of Star Trek


In a world where one can get
anything without any cost, would
you
 need to work?
 need money?
 participate in a market
economy?
The story of Star Trek is really…
 In the long run, we will all be
Marxists!
MARX’S ANALYSIS OF CAPITALISM: AN
OVERVIEW
Marx’s purpose: Demonstrate that even if
capitalism works as Ricardian suggests, the
system is still doomed to failure.
 Hence Marx assumes both perfect
competition and the labor theory of value.
 However, Marx does introduce the idea of
the reserved army of the unemployed.
 We will discuss these three issues as well
as Marx’s predictions.

WHAT DETERMINES THE PRICE OF A
GOOD?



An Answer from David Ricardo and Karl Marx…
The Labor Theory of Value - The price of a good is determined by
the cost of production, and the cost of production is dictated by the
quantity and quality of labor utilized.
What of the other factors of production?
 Capital: Capital is simply stored up labor.
 Land: Ricardo argued that the price of corn determined the
price of land, rather than the price of land determining the price
of corn. In other words, the price of land is price determined,
not price determining.
 What about demand? In the long-run, assuming competition,
price will equal the cost of production. This comes directly from
the work of Adam Smith
PERFECT COMPETITION



Marx assumes all markets are perfectly competitive.
Capitalists acquire inputs at their long-run competitive
price and sell the final product at its long-run
equilibrium price.
Why is this important?
Surplus value does not arise from labor being paid
less than it long run competitive price or from
commodities being sold at above long-run competitive
prices.
SURPLUS VALUE

Where does surplus value originate? According to Marx, labor creates more value than it is
paid.
1. The long-run competitive price of labor is equivalent to the socially necessary labor time
required to produce the real wage of labor (long-run subsistence wage).
2. If in eight hours labor has produced enough to earn the subsistence wage, and the work
day is eight hours long, then no surplus value exists. However, if the work day is twelve
hours long, labor produces four hours of surplus.
3. Capital owns the means of production. Labor either works the hours capital commands,
or not at all. Given this, capital can require labor to work more than what is necessary to
maintain the worker and thus realize a surplus value.
4. Surplus value can be increased by increasing the work day or increasing labor’s
productivity. Capital cannot change the subsistence wage, but through better technology
one can reduce the amount of time labor works for the equilibrium wage and increase the
surplus value.
RESERVE ARMY OF THE UNEMPLOYED
Marx reject the Malthusian population theory
(WHY?), hence he needs an alternative model
to explain wages.
 The reserved army of the unemployed is his
theory for why wages are kept low.
 Recruitment for the army comes from laborsaving machines.

MARX AND MONOPSONY POWER


The reserve army of the unemployed gives firms an advantage in
the negotiation with firms.
In other words, Marx is arguing firms have monopsony power
 Monopsony – a single buyer in a market.
 A firm in a competitive labor market is forced to pay a worker a
wage equal to the worker’s marginal revenue product.
 A monopsony, though, is the sole buyer in the market.
Consequently the monopsonist can require workers to accept
wages below the worker’s marginal revenue product.
EXPLOITATION
Implication: Monopsonistic firms exploit
their workers.
 Joan Robinson (1933): “What is actually
meant by exploitation is usually that the
wage is less than the marginal revenue
product.”

MARX VS. JB CLARK: OR WHAT YOU CAN DO IN SPORTS THAT
YOU CAN’T DO EASILY ELSEWHERE





The writings of Karl Marx argued that capitalism leads to the exploitation of
workers. In other words, Marx argued that workers in a capitalist society tended
to produce more value than they were paid by their employers.
In 1899, J.B. Clark published The Distribution of Wealth. This work argued that
workers under capitalism are paid according to their marginal productivity.
Therefore there is no exploitation in the capitalist system.
J.M. Clark – the son of J.B. Clark – argued that his father’s statements about the
ethical implications of marginal productivity “are oriented at Marx, and are best
construed as an earnest, and not meticulously qualified, rebuttal of the Marxian
exploitation theory.”
Neither Marx or Clark provided empirical evidence supporting their ideas. And
this is not surprising. Outside of sports, how can one measure marginal
productivity?
In other words… outside of sports, how can we know whether or not a worker is
being paid according to their economic contribution?
EXPLOITATION IN SPORTS
Research in sports indicates that when firms
have monopsony power – as they did in
baseball prior to the establishment of free
agency in 1976 – players were “exploited”.
 In contrast, when players are confronted with a
free market, wages tend to equal a player’s
marginal revenue product.
 In sum, Marx and Clark can both be right. The
answer depends on the nature of the labor
market.

BUSINESS CYCLES AND THE RESERVE ARMY
Expansion lead to a greater demand for labor
and wages rise as the reserve army falls.
 Business responds by substituting capital for
labor in the production process
 Reserve army rises, thus wages fall, and profit
increases.
 This causes again a greater demand for
workers, which starts the process over again.

CRISIS OF CAPITALISM




The decline in profit represents a crisis in capitalism,
where the smaller firms are driven out of business.
Business crisis is not the exception to the rule of
capitalism, it follows from the rules of capitalism.
Each successive crisis leads to bigger and bigger
enterprises. Each successive crisis lead to bigger and
bigger firms failing.
In this lies the seeds of capitalism’s destruction (note:
that is not the same story from before)
PREDICTIONS FROM MARX
The falling rate of profit both during the business cycle and from business
cycle to business cycle.
Competition in the labor market and the commodity market will lead the
capitalist to increase the use of capital and thus reduce profits. Why does
this reduce profits?
Because labor produces profits, not capital.
As more and more capital is used in production, profit will fall because profit
cannot be realized from capital. If we have perfectly competitive capital
markets then the price of capital equals its long-run normal rate of return.
Marx is correct that profits do fall, although the idea that labor is the sole
source of profit is incorrect. He is also not alone in this perspective. Smith
and Ricardo share this perspective.
Do profits fall from business cycle to business cycle? This is not as clear.
PREDICTIONS FROM MARX
The ceaseless quest for new technology
How do firm’s overcome falling rates of profit? With new technology.
Growth in capitalism is caused by improved technology, again in this
lies the seeds of capitalism’s decline.
NOTE: Marx sees improved technology as a negative, not a positive!
PREDICTIONS FROM MARX
A propensity to business crisis
In Marx’s day, such a prediction was not exactly consistent with
observed phenomenon.
Today, however, the business cycle is taken as given. As the work of
Schumpeter reveals, one can argue the business cycles does occur
because profit opportunities are destroyed via competition, and new
technology is required to revive the system.
PREDICTIONS FROM MARX
The Concentration and Centralization of Capital
Again, with each successive crisis, the larger firms survive, the small
firms fail.
Again, in 1850 this was hardly an obvious statement.
PREDICTIONS FROM MARX
Increasing Misery of the Proletariat
The self-employed will be increasingly forced to sell their labor-power
in the market.
At the beginning of the 19th century, 75% of Americans were selfemployed. Today, less than 10%. Why? The power of larger firms
overwhelms the smaller enterprises.
PREDICTIONS FROM MARX
Capitalism will collapse
The advent of mixed capitalism suggests that pure capitalism is
untenable. Marx did not see the countervailing power of government
and organized labor.
Had capitalism not been tempered by the power of government
would it have collapsed?
WHAT HAPPENED?
 Marx died in 1883
 In 1917 – 34 years after Marx died -- the communists took over
Russia
 The system implemented was supposedly based on Marx, but
actually was simply another version of a system based on
extractive institutions.
 Centrally planned socialism, or what is commonly referred to as
communism, is the version of this economic system that was implemented.
 In this system, the government creates a central plan which answers all of
the basic questions facing society.
 The plan determines what will be produced, how the goods will be
produced, and who is given the goods after production
IS CENTRAL PLANNING A NEW IDEA?

from: http://whynationsfail.com/blog/2012/8/13/central-planning-in-history-the-greek-bronze-age.html
 The idea that the central planning of the economy in the Soviet Union was
driven by ideology seems compelling and obviously true. But it isn’t that simple
actually.
 For one thing, it turns out that centrally planning the economy was not
something rare or anomalous in history. Actually, it was quite common. So
central planning in itself has nothing whatsoever to do with Marxism.
 To see what might have driven central planning as a way to organize the
economy, let’s consider some famous historical examples of central planning.
One of the best documented and agreed on occurs during the Greek Bronze
Age.
 Around 3200 BCE there was the start of the Bronze Age in the Eastern
Mediterranean. Though this terminology refers to the use of bronze (an alloy of
copper and tin) which replaced stone for tools and weapons, there was a whole
series of correlated technological, social and political changes. In particular the
Bronze Age was associated with increased political centralization and the
formation of states throughout the Mediterranean basin.
IS CENTRAL PLANNING A NEW IDEA?
 from: http://whynationsfail.com/blog/2012/8/13/central-planning-
in-history-the-greek-bronze-age.html
 How did the economy of the Greek Bronze Age states work?
 Since there was no money, the state basically moved around all of
the goods itself by fiat. It supplied food and inputs to weavers and
then took their output. It stored large amounts of food and goods in
the palace complex.
 As T.J. Killen puts it:
 the key role in the movement of goods and the employment of labour
was played, not by a market or money, but by a central redistributive
agency… in the Mycenaean world, by a central palace.
 Killen concludes:
 this was a redistributive (or command) economy.
DID CENTRAL PLANNING WORK?
 from Why Nations Fail, p. 128
 Before 1928 most Russians lived in the countryside. The technology
used by peasants was primitive, and there were few incentives to be
productive. Indeed, the last vestiges of Russian feudalism were
eradicated only shortly before the First World War. There was thus
huge unrealized economic potential from reallocating this labor from
agriculture to industry. Stalinist industrialization was one brutal way of
unlocking this potential. By fiat, Stalin moved these very poorly used
resources into industry, where they could be employed more
productively, even if industry itself was very inefficiently organized
relative to what could have been achieved. In fact, between 1928 and
1960 national income grew at 6 percent a year, probably the most
rapid spurt of economic growth in history up until then. This quick
economic growth was not created by technological change, but by
reallocating labor and by capital accumulation through the creation of
new tools and factories.
DID PEOPLE THINK CENTRAL PLANNING
WOULD WORK?
 from Why Nations Fail, p. 128
 Growth was so rapid that it took in generations of Westerners.
…It took in the Central Intelligence Agency of the United
States.
 It even took in the Soviet Union’s own leaders, such as Nikita
Khrushchev, who famously boasted in a speech to Western
diplomats in 1956 that “we will bury you [the West].”
 As late as 1977, a leading academic textbook by an English
economist argued that Soviet-style economies were superior to
capitalist ones in terms of economic growth, providing full
employment and price stability and even in producing people
with altruistic motivation.
WHAT HAPPENED TO CENTRAL PLANNING?
 from Why Nations Fail, p. 128
 Though the policies of Stalin and subsequent Soviet
leaders could produce rapid economic growth, they
could not do so in a sustained way. By the 1970s,
economic growth had all but stopped. The most
important lesson is that extractive institutions cannot
generate sustained technological change for two
reasons: the lack of economic incentives and resistance
by the elites. In addition, once all the very inefficiently
used resources had been reallocated to industry, there
were few economic gains to be had by fiat. Then the
Soviet system hit a roadblock, with lack of innovation
and poor economic incentives preventing any further
progress.
THE PROBLEM OF INCENTIVES
 from Why Nations Fail, p. 131
 Focusing on the different rules and bonus schemes tends to mask the
inherent problems of the system. As long as political authority and power
rested with the Communist Party, it was impossible to fundamentally change
the basic incentives that people faced, bonuses or no bonuses.
 Since its inception, the Communist Party had used not just carrots but also
sticks, big sticks, to get its way. Productivity in the economy was no different.
A whole set of laws created criminal offenses for workers who were
perceived to be shirking. In June 1940, for example, a law made absenteeism,
defined as any twenty minutes unauthorized absence or even idling on the
job, a criminal offense that could be punished by six months’ hard labor and
a 25 percent cut in pay. All sorts of similar punishments were introduced, and
were implemented with astonishing frequency. Between 1940 and 1955, 36
million people, about one-third of the adult population, were found guilty of
such offenses. Of these, 15 million were sent to prison and 250,000 were shot.
In any year, there would be 1 million adults in prison for labor violations; this
is not to mention the 2.5 million people Stalin exiled to the gulags of Siberia.
 Still, it didn’t work. Though you can move someone to a factory, you
cannot force people to think and have good ideas by threatening to
shoot them.
WHY NOT IN ENGLAND OR
THE UNITED STATES?
 The revolution predicted and encouraged by Marx did not
occur in England or any other industrialized nation.
 Rather, via democracy (i.e. inclusive institutions), the inequity
of capitalism was addressed.
 Workers were allowed to unionize, which raised wages and
redistributed the gains of the firm from the owners to
workers.
 Furthermore, the government frequently stepped into the
marketplace to resolve the problems people saw with
capitalism.
 And finally, and perhaps most importantly, inclusive
institutions and economic growth allowed more and
more people to improve their standard of living in
industrialized nations.
1.
A communist nation will be a democratic nation
2.
The government of a democratic nation represents the
people
3.
The people are workers
4.
So the government represents workers
5.
And if the government owns everything, that is the same
thing as the workers owning everything
Summarizing Marx





A number of his predictions appear to come true
His big prediction – capitalism will fail – does not
come true… yet! (back to Star Trek)
In the end, Marx the economic theorist is
undermined by Marx the political theorist
He seems to get much of the economics right. But the
politics doesn’t work out like he thinks.
Or perhaps…Marx wants to live in a world that
simply doesn’t exist in the 19th century